States Fall for Corporate Blackmail

Incentives take billions off tax rolls

By Frosty Troy

"Of course it makes me sick to my stomach. but you have to play
the game." The remark was made by an ultraconservative state
legislator while shaking his head.

He was referring to corporate America's professional blackmailers
who specialize in a game known as "If we don't get better tax breaks
and other freebies from you we will go where the grass is
greener."

Oklahoma has $1.4 billion in "industrial development" tax breaks
on the books -- and more are being added.

It's a bait-and-switch con that Oklahoma has repeatedly been
caught in.

Most recently American Airlines talked of closing one of three
maintenance of facilities, including Tulsa, and walked away with a
pot of gold from Tulsa ($22 million) Fort Worth ($25 million) and
Kansas City ($81.5 million).

American didn't stop there, putting the heat on the Oklahoma
Corporation Commission for a special electric rate. The Commission
wisely turned thumbs down. The airline already gets a vastly reduced
Tulsa water rate and other goodies.

American's Tulsa facility is superb, with an outstanding
Transport Workers Union workforce. Productivity of the 7,000
employees is the best in the industry. Chances of it being closed
were slim and none, but Tulsa voters weren't willing to gamble.

St. Anthony's Hospital threatened to move from downtown Oklahoma
City, creating a panic in city and county governments, picking up a
windfall in the process.

That led Integris Hospital to bawl they wanted freebies, too.
That's how the con game proliferates.

There was a Republican move in the Legislature to bail out
mismanaged Williams Co., of Tulsa, by using state pension funds. Gov.
Brad Henry quickly nixed that idea.

Williams settled out of court with the state of California for
gouging on power supplied to the state. California was ripped off for
more than $11 billion by Williams, Enron and other companies.

And there's the Boeing gambit -- possibly building a new plane
that has several states, including Oklahoma, on their knees, willing
to almost go bankrupt to win this prize. There's talk of a special
session of the Legislature if Boeing looks favorably at Oklahoma.

No special session for the thousands of state employees
furloughed. No special session for the 5,200 public education
employees who have lost their jobs, or the 650 higher education
faculty and staff positions eliminated.

As noted by Governing Magazine, targeted tax incentives violate
sensible tax policy. Yet, they keep proliferating. In Oklahoma it's
the Quality Jobs program which is not routinely audited by a Tax
Commission riddled with corruption.

A few years ago hotel giant Marriott International "hinted" it
might move its headquarters out of Maryland's Montgomery County.
Virginia politicians sprang into action, offering Marriott $6 million
to cross the Potomac River.

Fearing the loss of 3,000 high-paying jobs and a high-profile
employer, Maryland countered with $58 million worth of incentives and
Marriott stayed put.

It turns out that Marriott was never really interested in leaving
Maryland. But it still received a windfall for staying put. Marriott
is also one of those corporations with numerous offshore tax shelters
to keep from paying its fair share of taxes in America.

Public finance experts have long criticized such incentives as
violating all the established principles of sound tax policy. Yet,
these incentives have proliferated over the past quarter century.

Hundreds of companies have received tax breaks worth billions of
dollars. Alabama -- a leader in the use of incentives -- has
granted Mercedes Benz more than $250 million in tax relief.

Oklahoma City just ponied up nearly $20 million to Bass Pro for a
retail outlet that might have gone to Tulsa. It was probably
coincidental that 20% of the company was owned by the company
promoting it, the Gaylord colossus which publishes the state's
largest daily newspaper. Oklahoma has come up with millions for the
remodeling of two tire manufacturing plants in the state.

"When it comes to spurring economic growth, incentives are
certainly the quick fix. Other ways of attracting companies --
creating better schools and transportation systems -- take years to
develop," wrote David Brunori of State Tax Notes.

"Tax incentives can be pushed through the Legislature
licketysplit and then, just as quickly, the governor and legislative
leaders can be standing at a ribbon cutting ceremony announcing a new
manufacturing plant that will employ hundreds of citizens."

Despite its political allure, the targeted tax incentive is a
poor policy choice. First. and most important at this time, it costs
a lot of money. Even conservative estimates place the lost tax
revenue at billions of dollars over the past decade. Curbing or
ending their use could balance the budgets in many states.

Do companies really make critical decisions based on a state's
tax code?

Corporations are far more interested in access to market, an
educated workforce and labor costs than state tax burdens. Even right
to work ranks far down the scale in the decision on a plant
location.

As former US Secretary of the Treasury Paul O'Neill said during
his confirmation hearings: "I never made an investment decision based
on the tax code. Good business people don't do something because of
[tax] inducements." O'Neill led corporate giants
International Paper and Alcoa.

Tax incentives are patently unfair. Typically, a corporation is
offered significant tax breaks for creating a certain number of jobs
and investing a certain amount of money in the state. But what of the
companies that have already created the jobs and invested the money?
An attempt in Oklahoma is being made to address that inequity.

Corporations that threaten to leave a state often receive tax
breaks for staying put. But what about the companies that do not have
the nerve or guile to threaten to leave? The companies and
individuals not receiving concessions end up paying more to support
public services.

Tax-incentive programs suffer from a lack of accountability.
Neither the public nor most political leaders know if the
corporations are doing what they promised. There are often no
guarantees that the recipients will create good-paying jobs or that a
company won't close down the operation a year or two later.

Some years ago a small Oklahoma community sought to win location
of a helicopter manufacturing facility. They ended up holding the bag
when the company folded before the first helicopter was produced.

That was a product of Oklahoma Industries Authority, which
engaged in self-dealing and shameless conflicts of interest until the
Legislature finally cracked down. Its permanent chairman was the late
E.L. Gaylord who enriched his own investments via the authority's
bonding maneuvering

Former Gov. Frank Keating spent a fortune in taxpayer money,
offering the moon to land a high-tech plant that opted for Utah,
where it folded. Utah ended up eating all the new access highways and
other inducements.

Under the current system, government action is prompted by fear
of losing jobs to other states, dubious promises and empty threats.
The system prompts companies that do not receive incentives to lobby
legislatures for similar breaks. And, the incentives run roughshod
over the ideal that government should minimize its presence in the
marketplace. Competition among the states, based on low tax burdens
and good public services, is a good thing. Oklahoma has the
third-lowest combined local, state and federal tax bite in the
nation.

The market basket survey by the US Department of Agriculture
shows that food is about 15% less in Oklahoma than the national
average.

Oklahoma has one of the five lowest-cost housing markets in the
nation. The state is located at the crossroads of America (I-35, I-40
and I-44), has a superb labor force and a CareerTech system second to
none. Does the state need more gimmicks?

The State Chamber keeps promoting tax giveaways, too dumb to
realize that the same investment in education would pay far higher
dividends.

"Providing tax breaks to particular companies in return for a
promise of doing what most companies would do anyway violates all
notions of good government," Brunori wrote.

"Ending the practice would result in a fairer, more efficient and
more accountable public-finance system. It might just save states a
little money as well."

Meanwhile, Oklahoma has to play the game -- as disgraceful as
it is.

Frosty Troy is editor of The Oklahoma
Observer, where this originally appeared. Email
ftroy@keytech.com.